Is Arribatec Group (OB:ARR) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Arribatec Group ASA (OB:ARR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Arribatec Group

How Much Debt Does Arribatec Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Arribatec Group had kr31.6m of debt, an increase on kr25.2m, over one year. But on the other hand it also has kr39.6m in cash, leading to a kr8.04m net cash position.

How Strong Is Arribatec Group's Balance Sheet?

The latest balance sheet data shows that Arribatec Group had liabilities of kr216.7m due within a year, and liabilities of kr53.1m falling due after that. Offsetting these obligations, it had cash of kr39.6m as well as receivables valued at kr132.8m due within 12 months. So its liabilities total kr97.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Arribatec Group is worth kr251.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Arribatec Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Arribatec Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Arribatec Group wasn't profitable at an EBIT level, but managed to grow its revenue by 7.3%, to kr568m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Arribatec Group?

While Arribatec Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow kr3.1m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Arribatec Group you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com